The US Fed is the first central bank to suggest it’s worrying about our addiction to QE. It’s about to become the test case for how to push both levers: gradual rate hikes & balance-sheet correction.

To quantify the impact on rates & gauge how policy should shift, we update our ‘Policy Looseness Analysis’. By including QE, QT, & fiscal considerations, our analysis beefs up the Fed’s Taylor Rule which recommends an unrealistically high & damaging peak rate.

By sustaining its proposed ‘non re-investment’ (QT) programme, the Fed could ‘take out’ as much as 130bp of further rate hikes by 2019. But, unless it’s accelerated, it would take till 2023 before the balance sheet is taken back to the $1trn considered ‘normal’.

Interest-rate normalisation will also be slow. Even a possible $1.1trn QT by 2019 leaves the de facto, QT-adjusted, real funds rate negative - on both our dovish & the FOMC’s hawkish rate views.

This gives credence to the ‘new normal’ view of low-for-longer global rates/yields, rather than a ‘normalisation’ in coming years to pre-crisis levels. Otherwise, the US’s eight-year expansion (its third longest) may not in summer 2019 become its longest ever...